It took a global pandemic to teach us just how fragile our supply chain operations really were. Alongside the hospital horror stories, there was an unexpected side effect of coronavirus – a global meltdown of logistics operations.
We saw goods left in ports because lorries weren’t available to collect them, localised petrol shortages because of a lack of lorry drivers, a scarcity of building materials and a lack of goods from computer chips to food-grade carbon dioxide. Sawmill operations slowed, eventually leading to a lumber shortage which impacted housebuilding.
The problems were complex and had many root causes. Labour shortages were certainly a big factor – some people in the supply chain were sick and others were self-isolating or in lockdown. Transport was severely curtailed as many countries closed airports and port workers were unable to work due to COVID or restrictions to prevent its spread. Many businesses scaled back their operations to allow for social distancing.
It wasn’t just the coronavirus at work on the supply side. Storm weather shut down petrochemical plants in some parts of the globe. Consumer behaviour also changed suddenly, with big increases in demand for products such as flour and exercise equipment as consumers turned to baking and home-based exercise. In the middle of it, the notorious Ever Given clogged up the vital Suez Canal link.
Whilst it didn’t help that China and the wider Asia region, the first step in the global supply for so many vital manufacturing components, was crippled by the first stage of coronavirus, it wasn’t the only cause of the wider problems. In the UK, we also saw the disruptive effects of Brexit as many businesses found out the hard way why the free movement of goods across the EU had been so invaluable.
The impact on ‘just in time’ supply chain
Perhaps the key learning for logistics teams was that the dominant manufacturing approach of ‘just in time’, which sees manufacturing components and materials arriving at factories just at the point of requirement, rather than being stored for use, assumed a level of global stability that we now know wasn’t to last forever.
With all players in the supply chain trying to be as lean as possible rather than as resilient as possible, there was little to no flexibility to cope with change. This meant that there simply wasn’t any warehouse space to stockpile parts and materials, there weren’t any spare lorries or drivers needed for when there was a backlog to catch up on.
Running lean inventories and minimising capacity and warehousing was good business practice from a cost-minimisation point of view but this left many businesses vulnerable to disruption.
What this meant was that the global supply chain found it hard to recover from the sustained shocks that beset it. There was little slack in the system to help recover from temporary shortages of goods. We know that the industries worst affected by logistical woes were those with long supply chains and any that are by nature particularly reliant on efficient transportation networks. This includes food and pharmaceuticals.
Supply chain disruptions are frustrating for some customers and disastrous for others. Many businesses have found themselves vulnerable to shortages of vital manufacturing components. Some manufacturers have seen their complex operations shut down because of a shortage of just one small component.
With many manufacturers relying on other manufacturers earlier in the chain for parts, the longer the supply chain and the further along it is, the more likely you are to be impacted. Shortages cascade down the long, global supply chain.
As a result of this complexity, the supply chain issues will take a long time to untangle. When goods and materials start flowing again, they aren’t necessarily going to fill the backlog of depleted inventories. Some players will have gone out of business, breaking links in the chain. Others will have pivoted and found other solutions, like using other suppliers in other markets.
The disruptive effect is deep and far-reaching. Whilst the global supply chain could perhaps have returned to normal business after a short-term localised shock such as an extreme weather event, the sustained and repeated effects of the pandemic have significantly altered operations in a way that won’t easily be undone.
Prior to the pandemic, logistics experts tended to advise on lean business practices, efficiency and cost-cutting. Will we now see a greater emphasis on resilience come out of this seismic period in the industry? Although that might seem logical, it also seems unlikely to happen.
With all players in relentless competition with one another, efficiency and cost-minimisation are likely to remain the dominant approach across the logistics and manufacturing industry as participants chase the thinnest margins. Cost-cutting is usually incompatible with resilience. And whilst it would be desirable to have more slack in the system, the costs of maintaining extra warehousing, fleet and workers is prohibitive for most businesses.
A changing world
For complicated reasons, including population displacement and workers not returning after layoffs, there are persistent labour shortages across the chain.
It’s particularly notable in China, where manufacturers are finding it hard to recruit enough workers. A key factor in this is thought to be a decline in rural workers migrating to find factory jobs post-pandemic but there’s also a preference for work seen as more skilled and more socially prestigious than blue-collar jobs.
Whilst the pandemic exacerbated this trend, there are other factors at play including a dwindling demographic labour pool, changed worker expectations and increased education levels – these are not going to be reversed. Whilst these problems affect China in particular, the same trends are apparent in many other emerging economies that have been the bedrock of manufacturing.
How customers have changed
One thing that might persuade the logistics and manufacturing industries to change their approach might be if customers have changed their mindset. If customers place a greater value on resilience in the supply chain, perhaps this could change working practices. Some business buyers may now be more cautious about which suppliers they use.
It’s possible that future contracts may go to suppliers that customers perceive to be more resilient to supply chain shocks. This might mean those which offer warehouse capacity, flexibility, that manufacture locally or that have transparent supply chains.
Customers may also find a completely different way to buy. We know domestic consumers changed their buying behaviour in significant numbers during the pandemic, with increased numbers turning to online channels for the first time or buying types of commodities they previously hadn’t purchased online. Business buyers changed their habits too, as they frantically tried new routes to source their goods and materials.
Many will have switched to other suppliers when their established ones failed to deliver. Procurement teams may have experimented with subscription services or community group buying sites for the first time. We could be seeing a big re-evaluation of how goods are sourced, across both businesses and consumers.
Last year we looked at the group-buying trend that some businesses are experimenting with, in an attempt to pivot rapidly and survive the business disruption of early lockdown. Small businesses in particular found their buying needs changed very rapidly as they scrambled to find new customers for their business.
Many restaurants survived only by ramping up their takeaway offering, which required them to get a lot of containers in a short space of time. Different types of businesses suddenly needed to make new types of purchases, such as personal protective equipment and hand sanitiser. Group buying helped these smaller operators get better prices for the goods they needed.
What this means for vendors is that some buyers may now be inclined to pay in advance to secure products, and to pay more to have preferential treatment when goods are in short supply.
They might be prepared to “buy off-plan” (to pay for goods ahead of their manufacture) or to buy options in commodity markets where prices are likely to fluctuate, such as wheat. They might choose to have goods shipped in ways they find more reliable or be prepared to pay more for a delivery service they favour.
They may even hedge their bets by buying from a greater number of suppliers rather than relying on one. They may even try to shorten supply chains by bringing some manufacturing of parts in-house, or favour local suppliers.
The need to be flexible
If consumers respond to supply chain shortages by switching providers or changing how they buy goods, this represents yet more disruption to the business landscape. As is always the case, the business environment consistently favours a flexible vendor. Brands are motivated to consider offering approaches that support a changed customer, perhaps by creating subscription services or membership programs.
In the midst of all this disruption, there’s still an opportunity for organisations that can flex enough to uncover it. Customer needs may have changed and they may now be more likely to pay upfront to be first in line when deliveries arrive.
There may also be greater value in being able to say you offer local sourcing and manufacture and shorter supply chains. This could re-shape manufacturing, with a decline in interest in sourcing goods and parts in far-flung parts of the world. With labour shortages an increasing reality in many parts of the world, automation is starting to look increasingly attractive. These trends could possibly change the way business is done in the long term.
With supply chains possibly becoming more regionalised, we could see an impact in some emerging economies. Emerging markets have tended to play a key part in production and manufacturing, making them absolutely key players in the early links of the supply chain.
With a reliance on the globalised manufacturing of components now looking riskier than it did before 2020, emerging market suppliers may now seem less attractive to decision-makers in established markets.
We’ve already seen how China is battling a major labour shortage in manufacturing, meaning that labour costs are likely to increase in this market. This means China’s pre-eminent role in supplying the world may be threatened. All in all, there’s a lot of change still ahead of us as none of these disruptive effects seems likely to be resolved in the near future.
Perhaps the most frightening thing about the recent upheavals has been the realisation that one of these disruptions could be repeated. The effects of global warming are already being felt around the globe, expressed by increasing numbers of extreme weather events.
The invasion of Ukraine heralds high inflation around the world, rising costs in a number of commodities including wheat and gas, and the threat of global recession. And the coronavirus hasn’t gone away – more variants are expected. We may yet look back on the pre-2020 era as the halcyon period of supply chain stability.